Money Still Matters - The Implications of M4X for Quantitative Easing (web publication)

In the twenty-sixty IEA Discussion Paper, Professor David B. Smith examines M4X as a measure of the supply of broad money.

It has been argued that quantitative easing (QE) is designed to prevent a collapse of broad money. However, the official M4 broad-money measure was growing rapidly when QE was introduced. This figure was, though, exaggerated by artificial transactions within banking groups and some have suggested that broad money supply measures should exclude these transactions (M4X).

This article tests whether the authorities, such as the Bank of England, are right to focus on M4X. It is concluded that M4X is more closely related to the wider economy than M4 but that the official M4X statistics need substantial improvement. The conclusions regarding QE generally are more nuanced and it is noted that the UK’s fiscal profligacy is exacerbating the downturn in the private-sector, despite politicians’ claims to the contrary.